Last week, an attacker exploited Midas Capital on Polygon and stole 368k jEUR, 237k jCHF, and 45k jGBP (see the details), leaving Synthereum with a bad debt. We have developed a plan to address this issue by diluting, acquiring, and repaying the bad debt.

TLDR:

• The protocol has inherited a bad debt of 368k jEUR, 237k jCHF, and 45k jGBP on Polygon (other jFIATs and other networks are not impacted).

• Jarvis Network and Jarvis LTD will commit funds and allocate a portion of their revenue towards acquiring, diluting and repaying the bad debt.

• Diluting the bad debt means buying and borrowing jFIATs from the protocol to participate in the current and upcoming incentives programs, reducing the proportion of unbacked jFIATs.

• Acquiring the bad debt involves purchasing jFIATs from the protocol and secondary markets and transferring them to an address that will hold them.

• The bad debt acquired can be re-collateralized by various means and/or repaid (i.e. burn the jFIATs without collateral).

• We will launch an app allowing anyone to assist us financially in acquiring the bad debt in exchange for debt tokens.

• Users who lost money in the exploit will also receive debt tokens.

• These debt tokens will be repurchased at a later stage with a premium, either using jFIATs or discounted JARVIS using bonds ala Olympus, if and only if the latter reaches satisfactory market cap and liquidity levels.

• Alternatively, veJARVIS holders with debt tokens will be entitled to generate additional veJARVIS.

• Midas has committed to reimbursing Jarvis Network and Jarvis LTD, as well as providing help with bribing Jarvis pools on Balancer, Velodrome, and Ellipsis to contribute to the dilution.

Bad debt and bank run

What is bad debt?

In the context of our situation, the term "bad debt" refers to the unbacked jFIATs that were stolen and no longer have collateral to support their value.

What is a bank run?

In our case, a bank run occurs when individuals rapidly sell their jFIATs out of panic. Those who sell last may incur a loss, either by selling jFIATs at a rate below their intended value or by being unable to sell at all and being left with unbacked jFIATs.

Why does a bank happen?

A bank run is caused by panic and distrust in the protocol and other holders. The bad debt creates a hot potato game and prisoner's dilemma situation for jFIATs holders. It is worth mentioning that a bank run could be caused by malicious actors seeking to profit from the situation by borrowing and short-selling jFIATs.

How can we prevent it?

First, we immediately communicate with key communities and partners, who are known users and holders of jFIATs. The majority of them, including major holders, have expressed their trust and did not panic-sell. Additionally, we have reduced liquidity in money markets to eliminate the risk of short-selling. These actions have helped to prevent a bank run, despite the initial panic selling that occurred.

Then, by taking action. It is necessary to acquire and dilute the bad debt to reduce the pressure on the protocol and jFIAT holders, and eventually repay it completely.

Dilution, acquiring, and repayment

Dilution

Diluting the bad debt involves minting more over-collateralized jFIATs on Polygon to decrease the proportion of unbacked jFIATs. This requires purchasing or borrowing jFIATs from the protocol’s Liquidity Pool, Wrapper, and Credit Line on Polygon (or on other chains, and then bridging them) and providing liquidity on secondary markets such as money markets or liquidity pools. In addition to diluting the bad debt, it also increases both primary and secondary market liquidity.

Users need incentives to do so!

• On Polygon, the current jEUR incentives on 0vix, and the upcoming jEUR one on Balancer (next week) and jEUR vault on BetSwirl (no ETA yet) will encourage users to buy or borrow jEUR from Polygon (or from other chains and then to bridge them) to generate yield.

• On Optimism, the current jEUR incentives on Velodrome will soon be accessible from Polygon with the upcoming jEUR cross-chain bridge. Users will be able to buy or borrow jEUR on Polygon and bridge them to Optimism.

• On BNB Chain, the current jCHF incentives on Dotdot (Ellipsis) will also be accessible from Polygon with the upcoming jCHF cross-chain bridge.

• We plan on launching programs on Gnosis Chain and Avalanche later this year, to provide more incentives to hold jEUR, jCHF, and jGBP.

Acquiring

Acquiring the bad debt involves purchasing jFIATs from the protocol and secondary markets and transferring them to Jarvis Network and Jarvis LTD. These entities are willing to take on the associated risks and hold the debt. Acquiring the bad debt will completely remove the risk of holding jFIATs.

Then, a portion of this bad debt can be repaid, while the rest can be used in ways that do not pose a risk and generate yield to aid in the repayment process.

For example, we can bring back collateral to the un-backed jFIATs by lending them or by supplying liquidity in a cross-chain bridge.

• A portion of the bad debt can be used to offer over-collateralized loans to users-owned vault (smart contract); these vaults will be seed by users, and can only participate in incentives programs. For example a user can deposit USDC in a vault, and the vault would borrow jEUR and PAR and deposit then in the 2eur (PAR) Balancer pool. We would use a vault to limit the action that a user can do with the jFIATs borrowed. The vault essentially re-collateralizes the bad debt.

• A portion of the bad debt could be deposited on the Polygon side of a cross-chain bridge, allowing for over-collateralized jFIATs from other chains to be transferred to Polygon. This equates to backing the bad debt with jFIATs over-collateralized on other chains.

Also, we can also use the bad debt for flash loans and AMM liquidity.

• A portion of the bad debt can be used as a liquidity reserve to perform arbitrages and liquidations using flash loans. These loans allow for jFIATs to be borrowed and repaid in the same transaction.

• A portion of the bad debt can be deposited into an AMM. However, this could affect the dilution of the bad debt: if the oracle price is lower than the market one, arbitrageurs will buy jFIATs from the protocol and sell them on the market, increasing the dilution; conversely, arbitrageurs will buy jFIATs on the market and sell them on the protocol, decreasing the dilution of the bad debt. Although there may be some variation in dilution, it will be minimal and can be easily compensated.

These four options would receive different allocations of bad debt.

Acquiring the bad debt can have several benefits, such as increasing the dilution of the bad debt and enhancing the liquidity on both primary and secondary markets. Additionally, it can increase the liquidity of cross-chain bridges and generate revenue from fees, interests, and incentives, which can accelerate the process of repaying the debt.

Repayment

Repaying the bad debt means buying and borrowing jFIATs from the protocol and secondary markets and burning them.

Repaying the bad debt will be done gradually through the use of revenue generated by the effective management of the bad debt by the protocol and Jarvis LTD, its primary stakeholder. Repayment may also occur occasionally by selling some assets owned by Jarvis Network and Jarvis LTD in favorable market conditions.

Financing the plan

The bad debt consisting of 368k jEUR, 237k jCHF, and 45k jGBP needs to be acquired with the help of the Jarvis Network treasury, Jarvis LTD and its shareholders, the protocol's stakeholders and partners, and the broader crypto and DeFi community.

Jarvis Network

We propose allocating $25,000 of the protocol's treasury towards acquiring a portion of the bad debt. The treasury holds approximately $250,000 in non-JRT assets, such as CRV, CVX, ETH, OP, BAL, MATIC, MIMO, and stablecoins. These assets are used to generate revenue and growth for the protocol (POL, farming, voting power, bribes, etc.); hence the threshold is set at $25,000. However, if market conditions allow for it, more funds may be allocated towards acquiring and repaying the debt in the future.

We also propose that a portion of the protocol's revenue, ranging from 20% to 100% depending on the revenue stream, be allocated towards regularly acquiring additional bad debt.

The protocol generates revenue with protocol fees and interests:

• 50% of the trading fees on BNB, Avalanche, and Gnosis.

• 20% of the interest by lending collateral on Aave on Optimism and Polygon.

• 100% of the interest by lending jFIATs through money markets or our Credit Line module.

The protocol generates revenue with POL:

• As a liquidity provider in our primary market, it earns trading fees and counterparty losses.

• As a liquidity provider in secondary markets, it earns trading fees and incentives.

• As mentioned above, the protocol also generates revenue through farming with its treasury.

• By leveraging the bad debt that it acquires, the protocol will also generate revenue.

Additionally, as Synthereum is nearing completion, Jarvis Network plans to develop additional applications and protocols on top of it, which will create new revenue streams and support the protocol's ongoing growth and expansion.

Once the bad debt has been fully acquired, the protocol will begin utilizing its treasury and revenue to repay it.

Jarvis LTD

Jarvis LTD raised $1.3M in 2020 to develop the Jarvis Network. Favorable market conditions and income generated from farming and providing liquidity in the protocol allowed the company to grow its treasury. Despite having spent around $1.25M for the development (salaries, recruiting agency, audits) and $250k in marketing (0-fee fiat on and off-ramp, sponsorship, grants, and events), Jarvis LTD still has over a million dollars (not including its JRT tokens).

Jarvis LTD and its shareholders are committed to allocating at least $200,000 to acquire and dilute a portion of the bad debt. These jFIATs will be used to provide liquidity in secondary markets. However, in order to ensure the continued growth and development of the protocol, Jarvis LTD must retain some funds, which is why the limit has been set at $200,000.

Stakeholders and the extended community

But to resolve this issue quickly, we will seek the assistance and support of the ecosystem's stakeholders, including holders of JRT and jFIATs, investors, partners, and users, as well as the broader crypto and DeFi community! Anyone who wishes to see Jarvis Network succeed, unfolds its vision, and keeps providing value to the ecosystem can contribute!

• We invite the community to purchase or borrow jFIATs from the protocol and participate in our yield programs on Polygon, to dilute the bad debt.

• We also will launch an application to assist with acquiring the debt, with or without a counterparty. It will consist in depositing jEUR, jCHF, or jGBP in a smart contract controlled by the governance. The contract will hold the bad debt and use it as described earlier. Users opting for “helping with counterparty” will receive EUR, CHF, or GBP debt tokens.

Once the bad debt is fully acquired, the protocol and Jarvis LTD will redirect their resources to buy back these debt tokens with a 10% premium. Alternatively, if the new JARVIS token market cap is above $20M, or its liquidity above $5M, and if the buybacks below compensate for its inflation, debt tokens could be used to buy discounted JARVIS using bonds ala Olympus.

Eventually, veJARVIS holders can also decide to keep their debt tokens and issue more veJARVIS against them, increasing their stake, voting power, and boost.

Raising funds

We have received advice to raise funds by selling JRT tokens, but we have decided not to proceed. We believe that the protocol can generate revenue and grow without the need for additional token sales. Additionally, we are moving towards near-zero inflation tokenomics, which would be incompatible with raising funds (it would require inflation and add future selling pressure on the tokens).

However, as mentioned above, we will launch JARVIS bonds under certain circumstances to help repay the debt faster.

Midas compensation plan

Midas has pledged to reimburse Jarvis Network and Jarvis LTD. Additionally, they will provide a weekly contribution of around $1,000 for voting incentives on Balancer, Ellipsis, and Velodrome platforms.

Moving forward

The governance will implement a more robust risk management framework for using the Printer to prevent similar incidents from happening in the future.

Additionally, the protocol will prioritize using its Credit Line (borrowing from the protocol) to minimize its exposure to money markets.

In the meantime, the protocol will also reduce the amount of liquidity available on money markets and maintain low available liquidity.

Conclusion

After having discussed with multiple people other the week to gather feedback, we are confident that this approach to addressing the bad debt is in the best interest of the protocol and all its stakeholders and that we will emerge stronger from this event. Nevertheless, we welcome more feedbacks!

We also want to give a special thanks to the ones who show their support one way or another: Paul from Morpho, Marouane from Unslashed, Warren from Mutative, our friends at Beefy, 0vix and Mean Finance, Gisli from Monerium, Klodio from Mimo, Pranjal from Tetu, Romain from Paladin, Julien de StakeDAO, Etienne from TRGC, Gauthier from Ondefy, Romuald from Betswirl, and of course the numerous people from the Jarvis community and from the broader crypto and DeFi community who reached out to us!